Buy Ambuja Cements, target Rs 225: ICICI Direct
Buy Ambuja Cements at a price target of Rs 225.
The current market price of Ambuja Cements is Rs 214.70.
Time period given by the brokerage is one year when Ambuja Cements price can reach the defined target.
Investment rationale by the brokerage-
Demand to stay healthy, realisations expected to improve: Led by higher rural income (hike in MSP) and execution of infra projects, the cement industry witnessed a strong traction for the 9MFY19 period, with IIP data stating a 14 per cent YoY growth in production for the period April 2018 to December 2018, albeit on a low base. With steady government spending towards roads development and low cost housing, private infrastructure projects, along with stable growth in the housing market, we expect the growth momentum for cement industry to continue. Though new capacities are being added, they are at the grinding level with limited clinker capacity addition. Thus, utilization levels are expected to improve at the clinker level, which gives better visibility for realisations. Hence, we expect, Ambuja to report a nearly 7.1 per cent CAGR in revenues (due to nearly 5.1 per cent volume CAGR over CY18-CY20E due to capacity constraints).
Capacity bottleneck constraints addressed: The announcements of capacity addition of 3.1 MT clinker plant and 1.8 MT grinding unit at Marwar, Rajasthan allays concerns on growth in the medium term, as Ambuja is already operating at 81 per cent utilization. The company plans to invest Rs 2,350 crore towards clinker plant, grinding unit, CPP and WHRMS at this location. This project is expected to complete by H2CY20E. Post these additions, the grinding capacity of Ambuja, will add up to 31.5 MT in FY20E. Also, funding for the same is slated to be done from internal accruals, thereby leading us to believe, that balance sheet would strengthen further and dividend payments would remain steady.
Valuations look reasonable, at below replacement cost: The demand momentum continues to remain healthy in company’s key area of operations led by government’s focus on construction of roads and affordable housing segment. Although margins for the cement sector remained under pressure, the same is expected to improve going forward with cost benefit flowing from low cost petcoke inventory, hike in load carrying capacity by trucks and expected price hikes going forward. In addition, improved visibility of capacity expansion of 3.1 MT is expected to allay growth concerns over the medium term. With the recent correction in the prices, the stock is available at below the replacement cost. Hence, we retain BUY rating with revised target price of Rs225 (ie. Valuing at CY20E 11.0x adj. EV/EVITDA & adj. EV/tonne $140/t).